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However, the Congress passed a legislation in 1992 which has changed the 401k rollover law. Now you have the opportunity to make a direct rollover. This means that the money no longer comes to you. It goes from your old company to your new company or your new plan. Now no taxes have to be paid and neither will anything tax be held back. If you choose this option, the entire amount from your 401k plan is rolled over. This applies to the vested employer contributions and vested employee contributions.
If you do not choose the direct rollover option and want the check to come to you, the money from your 401k account is immediately subject to a mandatory tax withholding. This amount is usually 20 percent of the taxable amount and your old company will send it to the IRS. The remaining 80 percent has to be rolled over within 60 days into a new retirement plan or you will have to pay 10 percent on the amount.
The 20 percent that is sent to IRS is to cover the possible taxes on the withdrawal amount but you can recover this amount after you fill out a special form when you are filing your next tax return. Be careful, if you forget to fill this form out, you will lose the 20 percent.
Even the 20 percent that is withheld has to be rolled over into your new retirement account within 60 days and this money has to come from your own pocket. If you do not add the 20 percent into your new retirement plan, it will be considered as withdrawn and you will have to a 10 percent tax on that amount.
That is why it is important to be very cautious when proceeding with an indirect rollover as there are laws that you have to adhere to.
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